The Red Line Agreement

This map is only for illustrative purposes--the red line was drawn
freehand using as a reference the map in: United States. Federal Trade Commission,
The International Petroleum Cartel, staff report to the Federal Trade
Commission submitted to the Subcommittee on Monopoly of the Select Committee
on Small Business, United States Senate (Washington, U. S. Govt. Print. Off.,
1952), p. 66

THE IRAQ PETROLEUM COMPANY

Formed in 1914, the Iraq Petroleum Company (originally Turkish
Petroleum Co.) brought together interests who for over a decade had been contesting
each other for a firm foothold in the Middle East. From the outset, the purposes
of IPC were to consolidate existing rights under common ownership and to preclude
competitive rivalry for future rights. Under an agreement adopted at the British
Foreign Office on March 19, 1914, the British-Dutch groups accepted a "self-denying
clause, stipulating that they "would not be interested, directly or indirectly,
in the production or manufacture of crude oil in the Ottoman Empire... otherwise
than through the Turkish Petroleum Co."

Conspicuous by their absence were the American companies, who
had remained profoundly disinterested in the Middle East. But scattered shortages
during World War I gave rise to a deep-seated fear that the United States might
be running out of oil. According to an industry source, "Fear of an oil shortage
in the United States was uppermost as a factor in international relations after
World War I. It was a hold-over fear from a narrow escape from scarcity in 1917-1918
when in the midst of war." Moreover, even before the use of the foreign tax
credit, the cost of leasing from private landowners (usually at a one-eighth
royalty rate) was generally higher than securing rights from governments. There
was also widespread concern over a foreign monopoly of all foreign oil resources.
The Senate launched an investigation, which found that American interests were
indeed being systematically excluded from foreign oil fields. In 1920, Senator
Phelan of California introduced a bill to establish a government corporation
to develop oil resources in foreign countries. Negotiations looking toward American
entrance into the Middle East as a participant in the Iraq Petroleum Company
began in 1922 and continued for six years, with the American firms represented
by Exxon (Standard of New Jersey). The U.S. companies, however, were frustrated
in their efforts to secure access to the new sources of supply, which were being
discovered with increasing frequency in Rumania, India, the Dutch East Indies,
Iran, and elsewhere:

Because of these factors, by the end of World War I nearly all of the important
American oil companies were actively seeking foreign reserves. In this search,
however, they were confronted in the Eastern Hemisphere with formidable obstacles,
the most important ones being the national and colonial policies of Great
Britain and the activities of British-Dutch oil companies which were, themselves,
engaged in the search for foreign reserves. The British-Dutch companies were
endeavoring to prevent the surrender of Empire reserves to the American "oil
trust," while at the same time they were busily protecting a similar trust
of their own. The national and colonial policies of other European countries
were directed to similar objectives. (Quoting United States. Federal Trade
Commission, The International Petroleum Cartel, staff report to the
Federal Trade Commission submitted to the Subcommittee on Monopoly of the
Select Committee on Small Business, United States Senate, Washington, U. S.
Govt. Print. Off., 1952, p. 41)

These restrictionist policies were dramatized by the British refusal
in 1919 to permit American oil companies to send exploration parties into Mesopotamia
(now Iraq). Formerly part of the old Ottoman Empire under Turkish control, Mesopotamia
after the war had become a "mandated" area under British control. Arguing that
the war had been won by all of the allies fighting together, the U.S. companies
and their government insisted upon an "open door" policy, specifically that
favored treatment not be accorded nationals of any one country, that concessions
not be so large as to be exclusive, and that no monopolistic concession be granted.
Although it was the British-Dutch interests which had the concessions, the American
firms supplied nearly three-fifths of total foreign demand, with Exxon alone
controlling over 50 percent of the U.K. market, and hence were in a strong bargaining
position. In July 1922, negotiations began looking toward American entrance
into the Iraq Petroleum Co.; with the U.S. companies represented by W. C. Teagle,
president of Exxon. After six years of seemingly interminable haggling, the
U.S. firms, on July 31, 1928, were granted a combined 23.75 percent share (divided
equally between Exxon and Mobil), with 23.75 percent shares, each, going to
British Petroleum, Shell, Compagnie Française Pëtrole, and the remaining 5 percent
to Gulbenkian. IPC was not operated as an independent profit-making company,
but was essentially a partnership for producing and sharing crude oil among
its owners. Profits were kept at a nominal level by charging the member groups
an arbitrarily low price for crude-a practice which reduced IPC's tax liability
to the British government and permitted the refining and marketing subsidiaries
of the groups to capture most of the profits resulting from IPC's operations.
This arrangement proved to be the source of considerable friction between the
large integrated companies on the one hand and the French and Gulbenkian on
the other. The French had only limited refining and marketing facilities, while
Gulbenkian owned none.

Between 1922, when the "open door" policy was first advanced,
and 1927, when it was in the process of being discarded, radical changes took
place in the world oil situation. The fears of a shortage, so widespread in
1922, were drowned in a surplus of oil. Instead of competing for the development
of oil resources, the international companies turned their attention to limiting
output and allocating world oil markets. Reflecting this change in economic
conditions, the American companies lost their enthusiasm for the "open door"
policy, particularly after their entrance into IPC had been assured. One of
the key provisions of the policy was the right of any responsible concern to
obtain by competitive bidding concessions on plots to be selected each year
by the Iraqi government. Originally backed by the American companies, this feature
was subsequently nullified by a clause permitting IPC itself to be a bidder,
thereby enabling the company to outbid any prospective lessee at no cost to
itself, since the proceeds from the sale were to be returned to IPC. Three years
after the American companies had been admitted, the concession was revised to
eliminate all provisions for sharing the concession with third parties. The
"open door," in the words of one industry observer, had been "bolted, barred,
and hermetically sealed."

In the early twenties when the American oil companies first became interested
in oil concessions in the Middle East, they placed great emphasis on what
was termed the "open door" policy, and, in fact, made the acceptance of this
policy a sine qua non of their participation in JPC. In this they were actively
supported by the American Government. In its initial stages the "open door"
policy was broadly interpreted to mean freedom for any company to obtain,
without discrimination, oil concessions, in mandated areas, particularly in
Mesopotamia. . . The "open door" policy which had been so strongly advanced
was discarded in subsequent years without a single test of its adequacy as
a practical operating principle.(Quoting United States. Federal Trade Commission,
The International Petroleum Cartel, staff report to the Federal Trade
Commission submitted to the Subcommittee on Monopoly of the Select Committee
on Small Business, United States Senate, Washington, U. S. Govt. Print. Off.,
1952, p. 109-110)

Competition among the owners themselves was precluded by retaining
the "self-denying" clause of the 1914 Foreign Office agreement. Within an area
circumscribed on a map by a "Red Line" encompassing most of the old Ottoman
Empire (including Turkey, Iraq, Saudi Arabia, and adjoining sheikdoms, but excluding
Iran, Kuwait. Israel, and Trans-Jordan), the owners agreed to be interested
in oil only through the IPC. When Gulf Oil, a member of the American group,
sought permission to exercise an option to purchase a concession in Bahrein,
IPC denied the request.

As one writer commented, the Red Line Agreement ". . is an outstanding
example of a restrictive combination for the control of a large portion of the
world's supply by a group of companies which together dominate the world market
for this commodity." In a confidential memorandum, the French described the
objectives of the agreement: "The execution of the Red Line Agreement marked
the beginning of a long-term plan for the world control and distribution of
oil in the Near East." IPC was so operated as "to avoid any publicity which
might jeopardize the long-term plan of the private interests of the group…"